By Lewis Krauskopf
NEW YORK (Reuters) – More stocks are joining the S&P 500’s latest march to record highs, easing concerns about a rally that has been concentrated in a handful of giant tech names for much of 2024.
The S&P 500 is on track to post a 5% gain in the third quarter, which ends Monday. This time, however, optimism that the Federal Reserve’s rate cuts will boost U.S. growth is driving investors to stocks of regional banks, industrial companies and other beneficiaries of a strong economy and lower interest rates, in addition to the tech-focused stocks already on the rise to sit. huge profits this year.
More than 60% of S&P 500 constituents have outperformed the index so far this quarter, compared to about 25% in the first half of the year.
At the same time, the equal-weighted version of the S&P 500 — a benchmark for the average index stock — is up 9% this quarter, outperforming the S&P 500, which is more influenced by the heavily weighted stocks of mega-caps like Nvidia and Apple.
The broader rally is an encouraging sign for stocks, investors said, following concerns that the market could be vulnerable to a reversal if the cluster of tech names underpinning the market falls out of favor.
The ‘soft landing’ story of resilient growth will be tested by employment data at the end of the week and at the start of the October corporate earnings season.
The second half of the year so far is “almost a mirror image of what the first half was,” said Kevin Gordon, senior investment strategist at Charles Schwab. “Even if the mega caps don’t contribute that much, as long as the rest of the market does well… I think that’s a healthy development.”
The Fed began its first rate-cutting cycle in four years earlier this month with a 50 basis point cut, a move Chairman Jerome Powell said was aimed at securing a resilient economy. Traders rate an even chance of another massive cut when the central bank meets again in November and expects cuts of more than 190 basis points through the end of 2025, according to LSEG data.
Several corners of the stock market are benefiting from expectations of lower interest rates and steady growth.
The industrial and financial sectors of the S&P 500 – seen by investors as among the most economically sensitive sectors – rose 10.6% and about 10%, respectively, in the third quarter.
Falling interest rates are also a boon to the stocks of smaller companies, which disproportionately suffer from high borrowing costs. The small-cap-focused Russell 2000 is up nearly 9% this quarter.
The market’s bond proxies – stocks with strong dividends – also attract investors looking for dividend income as bond yields coincide with interest rates. Two such sectors, utilities and consumer staples, are up 18% and 8% respectively this quarter.
Mark Hackett, head of investment research at Nationwide, said the broadening builds on a trend already evident before the September 17-18 Fed meeting.
“We would have this greater participation, this leveling out of performance across sectors, and then you would have the Fed cut more aggressively and that leads to … an acceleration of that trend,” he said.
‘VERY HEALTHY’
In total, seven of the eleven sectors of the S&P 500 outperformed the index in the third quarter. By comparison, only the technology and communications sector, which includes Google parent Alphabet and Facebook owner Meta Platforms, outperformed the broader index in the first half of the year.
The S&P 500 is up more than 20% this year, at record levels.
Meanwhile, the overall influence of the megacaps has declined. The combined weight in the S&P 500 of the ‘Magnificent Seven’ – Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta and Tesla – has fallen from 34% in mid-July to 31%, according to LSEG Datastream.
“I think it’s very healthy that technology has consolidated somewhat,” said King Lip, chief strategist at BakerAvenue Wealth Management. “We’re not in a bear market for tech by any means, but you’ve certainly seen some evidence of rotation.”
Investors will likely need further evidence of economic strength before the broadening trend can continue. The October 4 jobs numbers will be a test of the soft landing scenario, after the previous two employment reports were weaker than expected.
Market participants will also be eager to see non-tech companies post strong profits in the coming months to justify their profits.
According to Tajinder Dhillon, senior research analyst at LSEG, Magnificent Seven companies are expected to increase their third-quarter earnings by about 20%, versus a 2.5% earnings increase for the rest of the S&P 500. That gap is expected to shrinking in 2025, while the rest of the index is expected to grow full-year earnings by 14%, versus a 19% increase for the mega-cap group.
In a soft landing scenario, the Magnificent Seven “would not have to carry the earnings rebound alone,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a recent report.
“We’re in the ‘show me’ phase for the soft landing,” Shalett said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Bill Berkrot)
